Senate Minority Leader Mitch McConnell on 6 October offered a proposal under which the Republicans would allow Democrats to pass an emergency short-term extension of the debt limit without the threat of a filibuster. Previously, the GOP blocked the Dems' attempts to raise the debt ceiling.
Treasury Secretary Janet Yellen has repeatedly warned US lawmakers that the federal government may run out of cash by 18 October and face a default, unless the US Congress suspends debt limits. Some politicians speculated that one potential way out is to mint a $1 trillion platinum coin and then deposit it with the Federal Reserve. That would allow the president to get an additional $1 trillion to pay off the country's obligations without suspending debt limits.
Although a former director of the US Mint told Axios that the coin could be minted within hours of an emergency decision by Treasury Secretary Yellen, the latter rejected the proposal, denouncing the $1 trillion coin plan as a "gimmick".
Technically Possible and Legal, But Still a 'Gimmick'
The platinum coin concept is not new, it is technically possible and quite legal, says Steve Keen, honorary professor of economics at University College of London and author of "Debunking Economics". The idea first emerged during the US debt-ceiling crisis of 2011, when American congressmen debated the maximum amount of borrowing the federal government should be allowed to undertake.
However, Yellen is right in calling the $1 trillion coin plan a "gimmick," according to the professor, who regards the plan to circumvent the existing laws as a "silly" one.
According to the economist, the US government has found itself between a rock and a hard place, not only because of the partisan standoff between the Dems and the GOP but because "the law has been written by people who don't understand how money is created". Those people regarded the government as "an imposition upon the private sector rather than a net provider of cash for the private sector," argues the professor.
"So there are all these limitations of what the government can do, and the one thing they haven't put a limitation on is using the value of a platinum coin to balance the amount of money created by a deficit," Keen remarks. "So this, in a sense, is turning a misunderstanding about how money is created into an existential crisis for the American government."
The re-emergence of the $1 trillion coin concept indicates that the country is in a terrible fiscal position, warns Laurence Kotlikoff, professor of economics at Boston University, a Fellow of the Econometric Society and president of Economic Security Planning.
Yellen has good reason to reject the extravagant proposal, according to the economist: minting a $1 trillion coin would undermine confidence in the US government and the US economy. In addition to that, it may lead to inflationary expectations, which the nation doesn't need at this point, given that inflation is already soaring, argues the professor.
"The government has to act responsibly to raise the debt ceiling, but also needs to get its fiscal house in order in the long term," Kotlikoff says. "And we can't be printing as much money into the future as we have been in recent decades."
The New York Stock Exchange is shown, Tuesday, July 21, 2020.
© AP Photo / Mark Lennihan
Why Growing Debt, Not a Debt Ceiling, is the Real Problem
It's important to look for the roots of the unfolding financial debacle, according to Jack Rasmus, professor in economics and politics at St. Mary's College in California. The platinum coin – which the professor calls "a silly joke", – could not be an answer to the growing debt, according to him.
"Solutions to the debt should focus on the causes of the debt, which is the cumulative result of annual budget deficits," Rasmus says. "So what are the causes of the budget deficits since 2000? That year the debt was $4 trillion. It rose to $9 trillion when Obama took office in 2008. It rose to $17 trillion when he left in 2016. Trump drove it to $21 trillion by 2020. It’s now projected to rise to $28.5 trillion over the coming decade. So why have the deficits been so large every year, especially since 2008, been escalating the debt in turn?"
Slow economic growth, insufficient tax revenues and spending are to blame for the increasing debt, the professor said. In comparison with this dilemma, the ongoing "political pissing match between the US political elites" over the suspension of debt limits is not worth a plug nickel, according to Rasmus.
"The debt ceiling itself is an economically irrelevant rule," he says. "There’s no need to even vote on it. In the worst case the US Treasury could have the Fed simply print the money to continue debt servicing. The USA will never default on its Treasuries."
U.S. Senate Republican Leader Mitch McConnell (R-KY) is followed by Senator John Barrasso (R-WY) prior to the Senate Republicans weekly policy lunch at the U.S. Capitol in Washington, U.S., September 28, 2021.
© REUTERS / ELIZABETH FRANTZ
Risk of Potential Default is Postponed
Joe Biden said on Monday he couldn't guarantee the debt ceiling would be raised in two weeks, warning of a looming historic default. The president pinned the blame on the Republicans, who are still refusing to join Democrats in voting to suspend the debt limit.
For its part, the GOP refuted Biden's allegations, insisting that the ball is in the court of Senate Majority Leader Chuck Schumer who could solve the dilemma at any moment by instrumentalising a reconciliation mechanism so that the Dems could pass the debt hike without the Republicans. Nevertheless, the Democratic Party rejected the reconciliation proposal.
"It'd be intriguing if the Republicans got their way and they did block the debt ceiling and the platinum coin wasn't printed, then it could be a serious economic downturn that could be blamed purely on the Republicans," presumes Steve Keen.
The GOP justifies its position by citing an unwillingness to participate in an irresponsible "spending spree" unleashed by the Dems on the US economy. Thus, the Republicans similarly refused to vote for Joe Biden's recent $3.5 trillion social spending package, denouncing it as a waste of money and citing increasing inflation. What's more, the Republicans are concerned that tax hikes on corporations aimed at funding the package would eventually backfire on the US middle class and hinder the country's post-COVID recovery.
Senate Minority Leader Mitch McConnell outlined two options for the Democrats to increase the debt ceiling on Wednesday, according to ABC News. The media notes that both options require that Democrats increase the ceiling by a specific amount into December. However, even if the deal works the Dems risk finding themselves in the square one in December 2021, in case they fail to pass their Build Back Better projects, CBS News warns. This means that at the end of this year one might see the US Congress facing a potential default and floating the idea of a $1 trillion coin gimmick, again.